Accounts receivable financing involves a company selling their invoices to a factoring company. A factor will pay them a certain percentage of the amount of the invoices. For example, they might purchase a company’s invoices or receivables for 90% of the total amount. This money will be paid upfront.

The factor will then collect the money owed on the invoices. After they have done so, they then return all monies to the company who originally owned the debt. The factor is then paid a certain fee.

This factoring arrangement can be quite beneficial for businesses because it allows them to receive money when they need it most. As long as they have invoices and customers with a history of paying, they can leverage their hard work into cold hard cash. Instead of waiting on the invoices to be paid, they can use them to get money right away. This can be a lifesaver for some businesses that are struggling to stay open.

Cash flow is paramount for a business. Without it, employees cannot get paid, materials cannot be purchased, nor can utilities, and there is no money for operational costs. A company can be forced to come to a standstill without enough funds. This is never good and puts the business at risk. Receivable financing can help avoid this.

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Accounts Receivable Financing: The Ideal Tool To Finance Your Business

Invoice financing is also good because it does not require that a company go out and get a loan. Businesses that know nothing about factoring often believe that a loan is the only available option when they need money. Obviously, this could not be further from the truth.

However, because many people aren’t aware of accounts receivable financing, they become discouraged when they apply for a loan and are denied because they already have too much debt, have weak assets, IRS tax issues, poor personal credit or haven’t been in business long enough.

Receivable factoring could remedy their problem without forcing them to take out a loan. Although loans can be beneficial because they can keep a company in business, they do have to be paid back and can be costly. Fortunately, they are not always necessary. A factor can offer a business the money they need and it never has to be paid back.

When a company uses factoring as a finance option, they are able to get their money fast, often within 2-3 days. There are few other ways to receive monies so quickly. This can be a great help to a business that is desperate for cash and who cannot wait months to receive it or aren’t in a position to get a loan from a bank.